A discussion of economic, business, and environmental issues of importance in the Central Valley.

Tuesday, November 16, 2010

Would BDCP staff accept "dots" instead of dollars in their paychecks?

For a process that makes all sorts of high-minded statements about being guided by science, the flim-flam that passes for economics in BDCP is stunning. Here is the summary of the cost assessment in the BDCP options evaluation. (table E-2, page 13 of executive summary). Options 3 and 4 include isolated conveyance, a peripheral canal/tunnel. 4 dots is the highest ranking, 3 dots second highest, 2 dots is third highest, and 1 dot is the lowest ranking.

I thought the canal/tunnel had high costs, but according to BDCP, it is the choice that minimizes costs.

How did they do it? A look at the methods document is revealing. Instead of adding up dollars, they used unique rating scales for each cost category, thereby converting dollars to "dots" with an arbitrary, subjective scale. Here is an example of the scale they used (from page 2-59 of the assessment).

Apparantly, BDCP analysts reject the notion of assessing all costs with a consistent, uniform measure (dollars) that happens to be the same units that those costs will be paid in the real world. They reject the idea of using the units utilized by all credible economic assessments and budget analyses. Instead, it is better to slice the costs up into categories, apply arbitrary and inconsistent rating scales to each category, qualitatively assess the results, and then assign them a ranking.

It reminds me of those Wall Street geniuses who divided up and rebundled all those sub-prime mortgages into securities that magically made all the risk go away.

What a bold scheme. A cost category that is unfavorable to your preferred outcome can be assigned $2 billion between increments, whereas a category that is favorable to your preferred outcome can be arbitrarily assigned $0.5 billion per unit on the rating scale. Even better, we can assign all costs exceeding an arbitrary threshold to the lowest/highest rating. Thus, if the canal ends up costing more than $5 billion, say $8 billion, $13 billion, it doesn't matter at all, since everything above $5 billion is in the same rating class.

I wonder if this clever financial innovation can be used when it is time to pay back the bonds issued to finance the BDCP. If Wall Street bond buyers need a demonstration project to ensure it works, I recommend we use BDCP staff salaries as a pilot program, and issue paychecks in dots instead of dollars. We can redeem the "dots" for 25 cents on the dollar, using the same arbitrary "exchange rate" used in the BDCP options analysis. Also, mirroring the options evaluation, anyone earning more than a $100,000 per year will receive a fixed $25,000 payment since all salaries over the threshold are in the "very high" category and treated the same.

There are even more issues with the cost analysis, from the relevant cost categories that were eliminated, the double counting of issues already assessed for other criteria (cost is one of only 17 criterion used), to the comparison of "economic impacts" with direct costs as if they are the same thing.

Yes, I know the options evaluation was done in 2007, but it remains a critically important assessment. This is the analysis that was used to conclude isolated conveyance was the "most promising" option, a statement that BDCP participants had to accept to be included in the process. It is the analysis that was used to justify the singular focus on isolated conveyance from the beginning.

If (when?) BDCP fails, it will most likely be due to excessive costs and the lack of a real financing plans. Blame will be placed on the recession and other unknowns, but these assessments reveal that BDCP never treated costs or economics seriously from the beginning.

On second thought, I've got to try this with my wife. "Honey, as you can see in Figure 3, for your new car, a cost over $20,000 gets a high cost rating, but for my new car the scale shows that it has to go over $80,000 to get rated as high cost. Using this scientific scale, it is clearly optimum for us to get a BMW for me and a KIA for you. You might think it's unfair, but this is the same process used by the largest, and most complex habitat conservation plan in history that is committed to scientific rigor. Trust me."

2 comments:

That part of the BDCP process - where arguably the most critical decision was made with so little actual analysis - has been bugging me for a long time. Thanks for covering it in your blog! It is also notable that during 2007, interested observers were not provided with many of the documents that were being discussed at the allegedly "open" BDCP meetings, so it was impossible to effectively comment on these decisions.

About Me

I am Executive Director of the Center for Business and Policy Research at the University of the Pacific, where I have a joint faculty appointment in the Eberhardt School of Business and the Public Policy Program in the McGeorge School of Law.
My professional areas of expertise are regional economics (such as labor and real estate markets), and environmental economics. Much of my research has been on the economic impacts of environmental policies such as the Endangered Species Act, sea-level rise, climate change, and land use. Depending on the facts, these studies sometimes favor environmental viewpoints and sometimes business points of view.
This is a personal journal and reflects my thoughts at a particular time. I am open to changing my mind in light of new facts and better arguments.